Monday, 5 May 2008

Inflation and the budget

Our new government thinks that inflation is getting out of control, so all sorts of budget stringency are required to slay this evil beast.

In essence, it means that the consumer (you and me) has to be forced to have less money in his or her pocket.

But why has inflation shot up?

Without delving too much into the numbers, my reading of the press is that the price of food has shot up recently, and that is the main driver of inflation.

But why have food costs shot up? Are we all going to the supermarket and buying double the amount of fruit and vegetables that we did last year? Have the government nanny campaigns that have been persuading us to eat more fruit and veg paid off (one could say that they have born fruit perhaps?) Have prices shot up because of demand conditions for food in Australia?

Er, no. Food prices have gone up due to supply constraints on the whole. Bad harvests, the drought, that sort of thing. And there is of course China, with all those Chinese wanting to eat more hamburgers. But that is an overseas demand problem, not a local one.

So how is taking money out of our pockets (or alternatively, failing to give us more money) going to solve that problem?

We still need to eat. If I have $50 a week less in my budget, I'll eat the same amount of food and cut back my expenditure elsewhere. I'm not going to fucking starve because Wayne Swan wants me to.

Will reducing my income have any impact on increasing demand for pork by the Chinese? I don't think so.

Will giving me less money solve the supply problems caused by the drought? I don't think so.

So the argument is just plain silly.

The thing is, next year, the drought will be well and truly over, and we may see big falls in the price of things like meat and wheat (unless the Chinese hoover up even more food). I guess the government will then try to claim the credit for doing that.